The lease will govern the rights and obligations between a landlord and a tenant.
There is no legislation that will alter how the terms of a lease should operate in a time of crisis or force majeure.
Unless there are specific provisions in a lease that govern or provide for how the landlord and tenant relationship is to operate in a time of crisis or force majeure then the lease covenants will continue to apply and be capable of being enforced by the landlord and the tenant.
Legal Obligation to Close Places of Work
The Government has already announced the closure of third level education facilities, schools, childcare facilities and cultural institutions with effect from 12 March 2020 and all non-essential retail outlets with effect from 25 March 2020.
At present these are requests for compliance and are not legal measures. However the Government has created enforcement powers under the Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 which could be used to pass legal closure orders. Businesses therefore need to monitor closely further Government announcements and consider the implications of any new guidance, orders or directions as and when they are made.
As an existing piece of legislation the Safety Health and Welfare at Work Act 2005 must also be considered in the current context. This Act places duties on persons in control of a place of work to ensure that it is safe and without risk to health. These duties apply beyond those owed directly to employees. Once they apply then the requirements to undertake a risk assessment, hazard identification and the preparation of a safety statement for a place of work also apply.
As a general rule all commercial buildings will also be places of work so the duties under the Safety Health and Welfare at Work Act 2005 apply to all those in control of offices, shopping centres, retail units, hotels, industrial premises and all other places of work even if the persons in control of the work place do not themselves have employees in those buildings.
Landlords and tenants may also owe each other a common law duty of care to act in a way that does not cause harm to the other. This would also extend to employees of landlords and tenants.
However in the context of the Safety Health and Welfare at Work Act 2005 and the common law (and until any specific order is made by the Government under the emergency legislation) it is a matter for each party to determine appropriate measures for places of work.
As mentioned above unless there are specific provisions in a lease that govern or provide for how the landlord and tenant relationship is to operate in a time of crisis or force majeure then the lease covenants will continue to apply and be capable of being enforced by the landlord and the tenant.
The current Covid-19 pandemic would fall in to the category of an Act of God or force majeure.
Most modern leases do not usually contain provisions dealing with an Act of God or force majeure and how they impact on the contractual relationship between landlords and tenants.
However it is likely that the principal issues that will arise will revolve around a tenant’s payment covenants under a lease for:
- service charges; and
- insurance contributions.
Allied issues may also arise in respect of security and insurance.
Most modern leases only entitle tenants to claim rent suspension where damage from insured risks occurs and the premises is not capable of beneficial use and occupation as a result of that damage. This suspension right normally only applies for basic rents and service charges. It does not normally apply to payment of insurance contributions.
As such a tenant should not be able to claim the benefit of the suspension right where closure has occurred on foot of a Government direction.
However some tenants may advance an argument that closure amounts to a breach of the quiet enjoyment covenant in a lease. This is a covenant from the landlord that if the tenant complies with its obligations under the lease then the landlord will allow the tenant occupy and trade from the premises. Whilst this argument may be advanced (theoretical as it is) it is questionable that it is correct or would be upheld by a Court.
At present the Government closure directions are in the nature of requests for compliance and are not legal directions/orders. However the Government could use it powers under the Health (Preservation and Protection and other Emergency Measures in the Public Interest) Act 2020 to pass legal closure orders which would be legally binding. It remains to be seen in this circumstance if the Government would also legislate to give tenants relief from payment of rents where closure of a premises occurs on foot of a legal closure order.
Frustration of Contract
Some tenants may argue that as they cannot trade because of Government closure orders that the lease is frustrated and they have a right to terminate the lease.
Frustration is a contract law doctrine that states where a supervening event (outside the control of the parties to a contract) occurs which so significantly changes the nature of the contractual relationship between the parties and which was not reasonably foreseen at the time of the contract then the contract can be set aside.
Most of the decided cases on frustration underline the point that the supervening act is of a permanent and not temporary nature.
In the present context if a Government closure direction/order is of a prolonged nature landlords may see tenants making arguments that frustration of contract applies. This argument is more than likely to be advanced where a tenant wants to exit the lease and claim that the lease is frustrated by reason of an inability to trade based on the Government closure direction/order.
It would be difficult for a tenant to advance a frustration argument to claim that a tenant is not obliged to pay rent or service charges and then once the supervening event no longer exists that the tenant re-commences trade from a premises. This is because if frustration applies the entire contract (i.e. the lease) is at an end and is not temporarily suspended.
The other issue that will undoubtedly arise is tenant insolvency as a result of lack of trading. This is more likely to be an issue with retail tenants. Landlords therefore need to be vigilant on rent collections and make quick decisions on whether to seek to forfeit leases for non-payment of rents to ensure that premises do not become tied up in liquidations and/or receiverships so that landlords cannot re-let those units to third parties if necessary.
This point is raised as a matter of good housekeeping/reference rather than for the purpose of providing any specific advice on the issue as each case will depend on its own specific facts to be reviewed at the relevant time.
Landlords should also examine their insurances to see if there is business disruption insurance which would cover loss of rent.
Landlords also need to consider the impact of non-payment of rent by tenants where debt finance is in place and the rental income is being used to service debt and interest payments.
Where landlords have debt finance secured against tenanted commercial premises they will also need to be mindful of repayment ability/capacity if tenants cease paying rent.
Professional advice should always be taken before acting on any of the matters discussed. Please contact a member of our team should you wish to discuss this topic further.